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April 2, 2013

What Many Advisors Get Wrong About Young HNW Investors

Some advisors may have the wrong idea about what young investors want, Merrill study says

Among some of the stereotypes perpetuated about young investors are that they rely on social media for financial guidance, ignore professional advice and resist proven methods for investing. However, a survey released Tuesday by Merrill Lynch Private Banking and Investment Group found those stereotypes may be largely exaggerated.

The Young High-Net-Worth Insights Survey was conducted in February by Phoenix Marketing International among 153 investors between 18 and 35 who had at least $1 million in investable assets.

Most respondents said they understood their parents’ approach to investing and of those, many say their own investing style was similar. More than two-thirds said their parents had the right idea about investing and 65% said their parents’ approach still worked in today’s economy. Less than half said they knew more about finance or investing than their parents.

“Young investors want to know what to do over time and how to align that with their goals,” Michael Liersch, director of behavioral finance for Merrill Lynch, told AdvisorOne on Monday. They want to understand their investments and strategy, but they want guidance, too. Just 19% of young investors said they had a high level of understanding of financial subjects, and 25% said they had very little knowledge.

Almost 60% of respondents said they work with an advisor, but 72% of those also think of themselves as self-directed investors. “A lot of investors have the notion that you’re either conservative or aggressive; you’re self-directed or work with an advisor,” Liersch said. “You can be all of the above.”

In looking for an advisor, someone who understands their needs is the most important criterion, the survey found. “They want to be seen as a unique individual,” Liersch said, “and how they want that done is most critical. Start with the idea that there are no right or wrong decisions. There’s just the right approach for you.”

The majority of young investors are trying to grow their assets, while 12% are trying to preserve them. Nearly two-thirds said they would take on more risk for better returns. To reduce risk, 78% of young investors said they would make diversification a priority.

No matter how many times young investors log on to update their status or retweet a post, they still rely primarily on traditional media for financial information. Nearly 60% said they watch business news programs on television, 55% said they read newspapers and 52% said they read magazines for financial news. Just 27% said they use social media or blogs for their financial information.

“Social media is not helping young investors formulate their financial strategy,” Liersch said. “They want human interaction to do that.” Liersch stressed that social media is just one part of advisors’ approach to marketing to and communication with younger investors.

Frank Migliazzo, a private wealth advisor for Merrill Lynch agreed with that assessment, adding that in his practice he uses face-to-face meetings, email, research blasts and video conferencing as part of his overall marketing and communication strategy.

The survey found that some young investors in wealthy don’t talk about finances with their parents out of fear of disappointing their families or appearing entitled. Just 46% of respondents said they talk about financial matters with their parents.

“Regardless of inheritance, different families come with different philosophies about money,” Liersch said. He suggested there are two categories for how families approach money and finances with their kids. Some families communicate as much as possible, he said, while others avoid it because they don’t want money to define who they are as a family. “Both come from a positive place,” he said.